Market conditions in 2017 were so calm that investors may have forgotten what it’s like to see stocks move markedly lower. So far, 2018 has been the year of rising volatility. Most long-term investors will correctly tell you that while the journey might be bumpy, what really matters is the destination: a little volatility doesn’t have to throw you off course when you’re pursuing your financial goals. 

With the potential for continued market volatility, what can the early February equity market correction teach us as investors? Are there lessons beyond the wisdom offered during major volatility swings like stick to your long-term goals? We think so. As investors who actively search the market for opportunities in any macro environment, we see value in maintaining focus on two variables: an investable company’s fundamental strengths and its plans to deploy those strengths for consistent growth. In this blog post, we offer a quick post-mortem on the recent correction, and discuss a potential way forward for volatility-aware investors in search of opportunities.

The steady rise in Treasury yields has accelerated in 2018. Perhaps as notable, long-end rates, which proved immune from the upward pressure last year, have risen 0.40% since year-end to 3.14%. The increase across the yield curve is likely a result of the Federal Reserve’s tightening of monetary policy, better-than-expected global growth, the likelihood of a growing federal deficit, and signs of an uptick in inflation. In this blog post, we’ll assess how macro developments have affected the fixed income space, with insights for investors on what to keep in mind amidst volatile conditions.

The early-February market selloff was the largest weekly decline in two years. Intraday volatility was significant, with opening rallies concluding in selloffs and opening selloffs rallying into the close. Multiple factors contributed to the market swings, including elevated valuations, exuberant investor sentiment, and aggressive investor positioning. While many investors no doubt found the weeklong market fluctuations jarring, it’s important to remember that opportunities may be created by rocky market conditions. In this blog post, we’ll delve into those potential opportunities, with a focus on fundamentals.

Comparing the CBOE Volatility Index (VIX) with its prior one-month reading

The CBOE Volatility Index (VIX) closed on August 1 at 12.66. That reading is well below the VIX’s average over the past 10 years (20.67). Some say this reflects complacency on the part of investors and is a harbinger of downside market moves. I think it’s more likely that a low VIX is nothing to worry about.

For the uninitiated, the VIX is calculated from options on the S&P 500 Index and is supposed to reflect the market expectation of the index’s annualized 30-day volatility. I think the VIX is somewhat flawed and often misinterpreted as being a fear gauge. But most people fear losing money, not making money.

The volatility measured by the VIX reflects both the possibility of upside movements as well as the possibility of downside movements. Extremely elevated readings of and quick changes in the VIX can reflect a sudden increase in risk aversion. But remember: When some are fearful, others are greedy.

Insights for Investors. Keep the big picture in mind. Avoid the urge to speculate on short-term market moves. Be sure your risk exposures are consistent with your investment time horizon and risk tolerance. Stick to your discipline.

Today we have a guest post from Jeff Moser, a portfolio manager and chief operating officer at Golden Capital Management, LLC, a subadvisor of Wells Fargo Funds.

With the U.K.’s vote to leave the European Union (E.U.), the world has entered a period of heightened geopolitical risk. The Brexit vote likely will lead to additional referendums by other E.U. members, which could create an overhang for global markets.

One of the most discussed potential ramifications of Brexit relates to the impact on trade between the U.K. and the E.U. We believe these fears are overblown. While trade agreements between the U.K. and euro nations will be subject to change, the trade relationships likely will remain significant, and we expect the U.K. will continue its ongoing trade relationships with France, Germany, Italy, the U.S., and other countries.

Bags

Britain voted to leave the European Union on Thursday, the first country to leave the bloc. Polls earlier in the week indicated that the country would choose to remain, which caught markets off guard and sent them sharply lower.

In Asia, the Nikkei fell 7.92%, the Hang Seng Index was down 2.92%, and the Shanghai Composite lost 1.33%. European stocks also closed lower, with the French CAC down 8.04%, Germany’s DAX down 6.82%, and London’s FTSE down 3.15%. Sterling plummeted to its lowest level against the dollar since 1985 before rebounding slightly. Stocks of retailers, travel stocks, and homebuilders in the U.K. were especially hard hit.

In the U.S., the Dow slumped 611 points, with all 30 of its components declining; the S&P 500 Index tumbled 76; and the Nasdaq dropped 202. Decliners outpaced advancers by about five to one on both the NYSE and the Nasdaq. Financials were hit the hardest. In addition to the volatility from the Brexit vote, today also marked the annual rebalancing of the U.S. and global Russell indexes, which contributed to one of the highest volume trading days of the year.

Treasury prices strengthened, and gold futures climbed $59.30 to close at $1,322.40 an ounce as investors flocked to safety. Crude-oil futures slid $2.47 to settle at $47.64 a barrel.

For the week, the Dow lost 1.55%, the S&P 500 Index fell 1.64%, and the Nasdaq was down 1.93%.

For additional commentary on what’s next for the U.K., the E.U., and the markets, read Dr. Brian Jacobsen’s commentary Brexit: Buy the Dip, or Wait?